Are jobs being created or lost in AFTA?

Are jobs being created or lost in AFTA?

Romeo A. Reyes, Jakarta

The ASEAN Free Trade Area (AFTA) has been virtually
established four years earlier than originally targeted. The
average tariff for ASEAN six is now down to 1.5 percent from 12.8
percent when the CEPT agreement was signed in 1992. Tariff on 65
percent of products in the inclusion list has been removed
altogether. ASEAN six has committed to remove tariff on all
products in the inclusion list by 2010. The new members have also
committed to do so by 2015.

As membership of ASEAN expanded to 10, more agreements were
signed to liberalize further the product and factor markets.
The Bali Concord II was signed on Oct. 7, 2003 declaring the
formation of an ASEAN Economic Community (AEC) as a single market
and production base.

Guided by the principle of open regionalism, ASEAN has also
been negotiating free trade or closer economic cooperation
agreements with China, Japan, India, Republic of Korea, Australia
and New Zealand, and has begun consultations with the United
States and the European Union to lay the foundations for a
possible FTA in the future. The most advanced is with China with
whom a Comprehensive Economic Cooperation Agreement on Trade in
Goods has already been signed and entered into force on Jan. 1,
2005.

The real aim of ASEAN in establishing a free trade area and in
building an economic community of ten nations is not so much to
promote trade flows among member countries as to enhance the
competitiveness of the entire community, and thereby its
attractiveness as an investment destination, both from within and
more importantly from outside ASEAN.

By removing barriers to the flow of goods, services and
factors of production, ASEAN would become a single market of half
a billion consumers and a production base with a correspondingly
huge number of workers and production input suppliers. Economic
integration through product and factor market liberalization
would help reduce the cost of doing business in the community,
enable firms to realize economies of scale, attract domestic and
foreign investment, promote economic growth, and create jobs.
That is the premise. What has actually been happening? Are jobs
being created or lost in AFTA?

Studies on labor and employment implications of AFTA conducted
in four ASEAN countries, including Indonesia and the Philippines,
along with a regional overview, yielded a number of interesting
results. They were presented at a special workshop earlier this
month in Cambodia in conjunction with the ASEAN Senior Labor
Officials Meeting (SLOM).

ASEAN Secretariat data shows that total ASEAN exports
(excluding Lao PDR and Vietnam) grew by 12 percent and imports by
10 percent from 2002 to 2003 (when AFTA was virtually
established). Intra-ASEAN exports increased even faster for the
same period at 15 percent, reaching almost US$100 billion in
2003.

But since 1993, when the process of trade liberalization
under AFTA started, but long before it was virtually established
with a tariff range of 0-5 percent, intra-ASEAN exports of ASEAN
6 had been increasing. Except for a brief disruption during the
economic crisis in 1997-1998, it was growing at an average annual
rate of 11 percent. One might ask then whether recorded increases
in intra-ASEAN exports would have happened even without trade
liberalization under AFTA.

While ASEAN intra-regional trade has been increasing, it is
important to note that its share to total trade is still
significantly smaller than that of EU and NAFTA: ASEAN's share in
2002 was only 23 percent compared to 67 and 56 percent for EU and
NAFTA, respectively. This suggests that the extent of ASEAN
integration in terms of trade flows is still relatively shallow.

With respect to FDI inflows to ASEAN, a dramatic increase of
46 percent was registered from $13.8 billion in 2002 to $20.2
billion in 2003, in the face of declining global FDI flows since
2000, and notwithstanding perceived threats in the region such as
terrorism and SARS. However, review of foreign investment flows
into ASEAN in earlier years would reveal that the trend was quite
erratic, reaching a peak of $34 billion in 1997. The annual
average of $28 billion for the period 1990-1995 was even higher
than the level attained in 2003.

The studies reported that thousands of workers in the
Philippines and Indonesia lost their jobs as and when their
employers lost their competitiveness and relocated to other
countries, often to China, if they did not exit the market
altogether. Big loss of jobs was disclosed particularly in
textiles and garments and a number of other consumer products.

In Bandung alone, 67 textile/garment companies employing
around 10,000 workers reportedly ceased operations in 2003, with
many planning to relocate in other countries.

The story of the textile/garment industry is sad enough in
Indonesia. It is even worse and indeed tragic in the Philippines.
Textiles and garments used to be the country's top export earner
and employer in the 1980s and early 1990s, providing jobs to
around a million workers. Now it is a sunset industry with only a
few companies surviving the onslaught of competition from other
countries, especially China, which can produce and export at
lower cost. The MFA termination is foreseen to wreak more havoc
to the industry and to hammer the proverbial last nail into its
coffin.

Loss of competitiveness as a production base for a particular
industry in a particular country is of course not solely affected
by binding trade liberalization measures such as those committed
under AFTA. It is mainly affected by the relative cost of doing
business in the country and the real or perceived economic and
political conditions therein.

Clearly, jobs are lost and gained as markets are liberalized
and comparative cost advantages shift across sectors in response
to changes in market conditions. Jobs move from one industry to
another as and when losers disappear and winners emerge from an
increasingly open and competitive product and labor market.

The challenge for policy makers is to maximize the net gain or
at least minimize the net loss of jobs, and how best to manage
the movement of jobs and workers across sectors. In Vietnam,
which is one of the countries covered in the studies, it was
reported that there has been an overall net gain of jobs from
trade liberalization although most of the jobs created were for
unskilled and semi-skilled workers.

The writer is Senior Adviser, ASEAN-UNDP Partnership Facility.
The views expressed herein are personal and do not necessarily
reflect those of ASEAN, UNDP, or their respective member
countries.